“My main answer would be that the Friedman compromise — trash-talking government activism in general, but asserting that monetary policy is different — has proved politically unsustainable…
…You can’t, in the long run, keep telling your base that government bureaucrats are invariably incompetent, evil or both, then say that the Fed, which is, when all is said and done, basically a government agency run by bureaucrats, should be left free to print money as it sees fit.”, Paul Krugman, “Republicans’ Lust for Gold”, The New York Times, November 14, 2015
“Krugman, once again you distort and lie. Don’t believe me, read Mr. Friedman’s famous 1967 speech entitled: “The Role of Monetary Policy” in blog posting #73 below, for yourself. It is very clear that Mr. Friedman was just as concerned about The Federal Reserve making mistakes in judgment, with respect to its awesome monetary powers, as he was with any other centralized, government bureaucracy. The modern Fed has completely gone against Friedman’s monetary teachings. The modern Fed hasn’t targeted monetary aggregates for years, as Friedman strongly advised and yet does peg interest rates and the rate of unemployment for long periods, as he strongly advised against. If Friedman saw the modern, Greenspan/Bernanke/Yellen, Fed which has clearly been the source of much economic instability in recent decades, I believe he just might have advocated for “hard money” pegged to gold or at least the Taylor Rule, and he certainly would have supported “auditing the Fed.””, Mike Perry, former Chairman and CEO, IndyMac Bank
November 4, 2013 – Statement 73: “The first and most important lesson that history teaches about what monetary policy can do….and it is a lesson of the most profound importance…is that monetary policy can prevent money itself from being a major source of economic disturbance.” Milton Friedman
Here are three excerpts from Friedman’s, The Role of Monetary Policy:
“Unaccustomed as I am to denigrating the importance of money, I therefore shall, as my first task, stress what monetary policy cannot do. From the infinite world of negation, I have selected two limitations of monetary policy to discuss: 1) It cannot peg interest rates for more than very limited periods; 2) It cannot peg the rate of unemployment for more than very limited periods.”
“Let us assume that the monetary authority tries to peg the ‘market’ rate of unemployment at a level below the ‘natural’ rate….As in the interest rate case, the ‘market’ rate can be kept below the ‘natural’ rate only by inflation. And, as in the interest rate case too, only by accelerating inflation.”
“How should monetary policy be conducted? The first requirement is that the monetary authority should guide itself by magnitudes that it can control, not by ones that it cannot control. If, as the authority has often done, it takes interest rates or the current unemployment percentage as the immediate criterion of policy, it will be like a space vehicle that has taken a fix on the wrong star. No matter how sensitive and sophisticated its guiding apparatus, the space vehicle will go astray. And so will the monetary authority.”
“My own prescription is still that the monetary authority go all the way in avoiding such swings by adopting publicly the policy of achieving a steady rate of growth in a specified monetary total…I myself have argued for a rate that would on average achieve rough stability in the level of prices of final products, which I have estimated would call for something like a 3 to 5 per cent per year rate of growth in currency plus all commercial bank deposits or a slightly lower rate of growth in currency plus demand deposits only. But it would be better to have a fixed rate that would on average produce moderate inflation or moderate deflation, provided it was steady, than to suffer the wide and erratic perturbations we have experienced.”
Republicans’ Lust for Gold
It’s not too hard to understand why everyone seeking the Republican presidential nomination is proposing huge tax cuts for the rich. Just follow the money: Candidates in the G.O.P. primary draw the bulk of their financial support from a few dozen extremely wealthy families. Furthermore, decades of indoctrination have made an essentially religious faith in the virtues of high-end tax cuts — a faith impervious to evidence — a central part of Republican identity.
But what we saw in Tuesday’s presidential debate was something relatively new on the policy front: an increasingly unified Republican demand for hard-money policies, even in a depressed economy. Ted Cruz demands a return to the gold standard. Jeb Bush says he isn’t sure about that, but is open to the idea. Marco Rubio wants the Fed to focus solely on price stability, and stop worrying about unemployment. Donald Trump and Ben Carson see a pro-Obama conspiracy behind the Federal Reserve’s low-interest rate policy.
And let’s not forget that Paul Ryan, the new speaker of the House, has spent years berating the Fed for policies that, he insisted, would “debase” the dollar and lead to high inflation. Oh, and he has flirted with Carson/Trump-style conspiracy theories, too, suggesting that the Fed’s efforts since the financial crisis were not about trying to boost the economy but instead aimed at “bailing out fiscal policy,” that is, letting President Obama get away with deficit spending.
As I said, this hard-money orthodoxy is relatively new. Republicans used to base their monetary recommendations on the ideas of Milton Friedman, who opposed Keynesian policies to fight depressions, but only because he thought easy money could do the job better, and who called on Japan to adopt the same strategy of “quantitative easing” that today’s Republicans denounce.
George W. Bush’s economists praised the “aggressive monetary policy” that, they declared, had helped the economy recover from the 2001 recession. And Mr. Bush appointed Ben Bernanke, who used to consider himself a Republican, to lead the Fed.
But now it’s hard money all the way. Republicans have turned their back on Friedman, whether they know it or not, and draw their monetary doctrine from “Austrian” economists like Friedrich Hayek — whose ideas Friedman described as an “atrophied and rigid caricature” — when they aren’t turning directly to Ayn Rand.
This turn wasn’t driven by experience. The new Republican monetary orthodoxy has already failed the reality test with flying colors: that “debased” dollar has risen 30 percent against other major currencies since 2011, while inflation has stayed low. In fact, the failure of conservative monetary predictions has been so abject that news reports, always looking for “balance,” tend to whitewash the record by pretending that Republican Fed critics didn’t say what they said. But years of predictive failure haven’t stopped the orthodoxy from tightening its grip on the party. What’s going on?
My main answer would be that the Friedman compromise — trash-talking government activism in general, but asserting that monetary policy is different — has proved politically unsustainable. You can’t, in the long run, keep telling your base that government bureaucrats are invariably incompetent, evil or both, then say that the Fed, which is, when all is said and done, basically a government agency run by bureaucrats, should be left free to print money as it sees fit.
Politicians who lump it all together, who warn darkly that the Fed is inflating away your hard-earned wealth and enabling giveaways to Those People, are always going to have the advantage in intraparty struggles.
You might think that the overwhelming empirical evidence against the hard-money view would count for something. But you’d only think that if you were paying no attention to any other policy debate.
Leading political figures insist that climate change is a gigantic hoax perpetrated by a vast international scientific conspiracy. Do you really think that their party will be persuaded to change its economic views by inconvenient macroeconomic data?
The interesting question is what will happen to monetary policy if a Republican wins next year’s election. As best as I can tell, most economists believe that it’s all talk, that once in the White House someone like Mr. Rubio or even Mr. Cruz would return to Bush-style monetary pragmatism. Financial markets seem to believe the same. At any rate, there’s no sign in current asset prices that investors see a significant chance of the catastrophe that would follow a return to gold.
But I wouldn’t be so sure. True, a new president who looked at the evidence and listened to the experts wouldn’t go down that path. But evidence and expertise have a well-known liberal bias.
A version of this op-ed appears in print on November 13, 2015, on page A35 of the New York edition with the headline: Lust for Gold.